Citigroup sees KQ’s valuation at bourse rising

Money Markets

Kenya Airway’s share price has upward potential of 41 per cent, experts say. Photo/FILE 

By GEOFFREY IRUNGU

In Summary

• The valuation is based on a price to earnings ratio of 10, the historical one-year forward average for European flag carrier airlines which are comparable to Kenya Airways.

Kenya Airways’ valuation at the Nairobi Securities Exchange is expected to rise even if the airline does not return a profit this financial year.

 

Citigroup Global Markets, the investment banking arm of international financial giant Citigroup, said the share price had an upward potential of 41 per cent which would be driven largely by cost cutting.

“Management expects financial year 2015 to be a better year due to the cost savings and product enhancement of six B787s and two B777-300ERs being delivered,” said Citigroup Global Markets in a report dated June 25.

The analysts put the share price, at Sh15.50, with sentiment informing the direction of swings. The share closed last week at Sh11. The valuation is based on a price to earnings ratio of 10, the historical one-year forward average for European flag carrier airlines which are comparable to Kenya Airways.

Other analysts differ on the appreciation but concur that ongoing investments give the carrier a huge headroom for growth.

Sterling Capital Equities Dealer Augustine Misoka put the projection at between Sh10 and Sh12 despite admitting that the share remains undervalued. “We see the share fluctuating between Sh10 and Sh12. It is undervalued at Sh10 or Sh11, so there is a potential to rise but it faces risks from the tourism sector,” said Mr Misoka.

Standard Investment Bank said the fleet modernisation should improve its product offering. “Overall, the company expects to have a better product in the coming year with the ongoing fleet upgrade likely to reduce the age of the fleet from 8.1 years to 5.6 years by November 2015. The new fleet will replace the ageing B767s and provide some additional capacity,” said SIB.

Citigroup said investors risked dilution should new equity be issued to finance expansion plans. The company will invest up to Sh88 billion this financial year, which is to be fully funded through African Export-Import Bank.

SIB said in its analysis that higher finance costs are likely to be experienced due to the debt incurred in the airline’s expansion. “Finance costs are likely to go up over the coming year with the additional debt being taken up to finance the fleet expansion.”

Citigroup added that profits might be affected by stubbornly high jet fuel prices and rising competition from Middle East and other African airlines. “Profitability (may be) undermined by both network carriers and low cost carriers, potential infrastructure, regulatory and skill shortage constraints,” said Citigroup.

Kenya Airways narrowed loss to Sh3.4 billion for the financial ending March from Sh7.8 billion the previous year.

SIB said KQ’s load factor of 65.6 per cent – a measure of the utilisation of an aircraft’s passenger-carrying capacity – fell below the Africa average of 69.9 per cent. It had a load factor of 68 per cent in 2013.